Pick and choose: building a strong board of directors

Ask a corporate lawyer how the law defines the role of a member of a board of directors, and you’ll probably hear some variation of this: “Board members need to exercise the judgment of a reasonable person.”

That sounds easy enough. But any entrepreneur or C-level officer you ask will likely respond by saying they’d like to know where to find these people.

My wife Laura and I were having a discussion recently about what makes a good director, and therefore a good board. Laura has served on and led nonprofit boards. I’m a corporate lawyer who advises boards and the executives working on them. Our conversation went something like this:

Me: There’s just a huge difference in the effectiveness of the boards that companies have. It seems to come down to whether the board composition is right. I need to figure out how to help clients determine who will be a good board member.

Board Function

Laura: A lot of it depends on what the board is going to be asked to do. For example, the boards I’ve been on that are governing boards involve completely different skills from those that are fundraising boards or volunteer service boards.

Me: That makes sense. You really can’t choose a board member until you focus on what type of board you are recruiting for. I think it comes down to three things that you need to know about the person: traits, skills and connections.

Traits

Laura agreed these seemed like useful categories. She pointed out that a fundamental trait of a good board member was being secure. A director is more likely to be effective if he or she does not need to grab for power, leadership position, being right, or a host of other badges of being alpha.

I responded with an example of a highly effective CEO whom I worked with on an acquisition. He was hard-charging, energetic, used to making decisions that others carried out, and willing to take a risk to achieve his goals. As I rode to a meeting with him, we suddenly heard a horn honk as he switched lanes. I watched him swerve back into his lane to avoid an accident. His reaction surprised me. Instead of an angry tirade at the other driver, he waved and said, “Sorry, that was my fault.” He found it unnecessary to always be right. A person who is that secure can make a good board member.

Laura: So basically you are saying that everyone has a blind spot. A good director is willing to recognize his or her own. Another trait that’s important is that the person just play nice, one of the basic rules from kindergarten.

Me: Boards are most effective when directors can freely deliberate. A director who intimidates or criticizes others can shut down that process in a second.

Skills

Laura and I then talked about the difference between traits and skills. Traits are part of personality; skills are typically learned. Skills are probably the easier characteristics to detect in a potential director. Directors clearly need to have an understanding of business. It’s helpful – and sometimes necessary – for them to be able to read and understand financial statements. Other skills that a director needs will depend on the particular industry the business is in or the purposes the board serves. For example, a director of a startup that is launching a new medical product should probably have engineering, medical, or regulatory skills or experience.

Connections

The conversation then turned to connections. Venture capital funds tell companies that a benefit of putting one of their principals on the board is the connections they have, and that’s often the case.

Then there are industry-specific connections. One of the most effective boards I’ve worked with included a director who regularly offered to contact his colleagues in other companies in the industry to get information relevant to upcoming business decisions. That information proved pivotal to several important decisions, and could not have been easily obtained otherwise.

Connections to potential customers, suppliers, technology sources, public relations firms, and regulatory agencies can all make a director a valuable asset.

Money

We then moved on to another topic related to building a strong board.

Laura: What about money? That’s an important factor for some boards, particularly those involved in raising it.”

Me: It’s certainly a factor in nonprofit boards, and the same is true in the for-profit world. Directors may not need to be personally wealthy, but it’s always helpful if they can find funding for the company at a time capital is really needed. I usually put money under the category of connections, but it’s important enough to be a separate characteristic to consider.

Balance

We talked about how to balance these different considerations. I said that although money, connections and skills were important, none of those over-rode the need for a director to have the traits that would facilitate open discussion of tough issues, so that the board could make a sound decision.

Laura: So the bottom line is that a good director just needs to be a reasonable person.

Me: Just like the corporate statute says.

Erich Merrill is a partner in the Portland office of Miller Nash LLP, where he regularly works with company management and founders on a variety of matters, including corporate governance, business transactions and intellectual property. Contact him at 503-224-5858 or at erich.merrill@millernash.com.